Author: Allen Buchanan This post originally appeared on Location Advice and is republished with permission. Find out how to blog with us on theBrokerList.
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One of the perks of our profession is we get insights into future legislation at the state and federal level that can affect our livelihood. You see, the commercial real estate lobby is quite influential. Recall, the enormous push that occurred last year in California to defeat Proposition 15 which would have altered the way property taxes are calculated for commercial properties.
Presently, there is talk in Congress to gut tax deferred exchanges that are accomplished through section 1031 of the Internal Revenue code. Payback for the enormous infrastructure plan must come from somewhere and wealthy commercial real estate owners are a likely target.
Yesterday, I consumed a webinar hosted by David E. Franasiak, a Principal and Attorney at Williams and Jensen, PLLC and Julie Baird, President of First American Exchange Company. Discussed was the Biden Administration’s American Families Plan. Underpinning the direction – “The President would also end the special real estate tax break which allows real estate investors to defer taxation when they exchange property – for gains greater than $500,000”. Dissected were the three main components of the plan – a limit of $1,000,000 for couples filing jointly, Section 1031 would effectively be killed, and the proposal – if passed – could take effect for deal closed after December 2021.
As a quick review, tax deferred exchanges allow title holders of commercial real estate to defer capital gains taxes upon the sale of an income producing property. Certain criteria and time frames must be met. Otherwise, if a sale occurs – approximately 50% of the appreciation is consumed by Uncle Sam and Cousin Gavin. Therefore, motivation to sell would be stripped except in extreme cases.
Today, I’d like to look at exchanges from a different view – do they really matter to those without commercial real estate ownership? As I’m admittedly biased – I’ll simply offer three thoughts to consider.
Commercial real estate transactions employee a significant number of people. My premise? Elimination of transactions lured by tax deferral would also crater all the jobs associated with those deals. I once calculated 32 different folks were involved in a purchase. Specifically, escrow agents, title officers, environmental surveyors, roof inspectors, general contractors, sub-general contractors – air conditioning, electricians, plumbers, flooring. Not to mention professionals such as CPAs, attorneys, and wealth advisors. Loop in a few brokers and the ensemble is complete. Dollars earned – by those involved – are circulated back through the economy and groceries are purchased, rent is paid, and college funds established. And, state and federal income taxes are paid from their earnings.
Small business owners who reside in commercial real estate through ownership use the tax deferred exchange mechanism to expand their operations. Keep in mind, business owners use the IRS section 1031 to purchase larger facilities and grow their businesses. Operational growth means equipment is purchased, workers are hired, and taxable revenue is created.
Elimination of the tax deferred exchange mechanism would reportedly generate $19.5 billion over 10 years on a $2.4 trillion stimulus package. Unfortunately, the increment is so small – it’s akin to a rounding error. Too often, we lose sight of the unintended consequences of actions we take. As an example, when access to home loans was expanded in 2006 – the sub-prime meltdown resulted. Granted, there was more to that story – but you get the idea.
